Leading Off… What to Expect When You’re Expecting…

Tim Reazor
Chief Investment Strategist
NorAm Asset Management

You’re expecting the market to blow up any day now…. You’ve loaded up on puts and you’ve shorted all the high fliers. And what do you have to show for your efforts… a market that for the most part finished where it started today. Yes, stocks were soft and internals were weak, but come on! Where is the mass destruction? Where why isn’t NFLX at 100 already?! Read on my bearish friend.

The market doesn’t care what you want – it’s a market – it’s not your friend – it’s a cold and bloodless entity. It often times doesn’t make sense. Take Monday’s action – the Nasdaq futures we’re plus 40 heading into lunch, reversed to negative territory and closed higher. It makes no sense – and here in lies my point – don’t guess directions in a market as fickle as this one. Again, read on my bearish friend.

Most markets after selling off for some time will retrace back to the mean or to resistance. That resistance can be a key moving average – think 8, 21 or 34 period exponential or a 50-day simple moving average. After they hit these key levels they will then reverse lower and continue their downward march. You’ll want to construct your short trades around these zones of resistance. If you jump in too early you’ll most certainly be feeling the heat. You’ll also want to use smaller size incase you get caught up in a relief rally.

If all of this sounds to hard or nauseating do keep in mind that cash is a position. If you’d like some guidance on how you can make money in this market shoot me an email. We’re utilizing specific techniques for our clients designed for this market environment.

Back to the subject of what to expect when you’re expecting. If you’re expecting markets to go lower and you have an aversion to risk you can still participate. By risk averse I mean less risky than shorting stocks or buying directional puts. The easiest way to be a bear in the market is to buy TLT which is the iShares 20 year + bond ETF. If markets are going to continue lower TLT will continue to go up.

Here’s what to expect from TLT in the near term. If markers push lower TLT will most likely clear current resistance at $111 and head north of $113. If markets are still heading lower TLT will consolidate at the 113/115 level. If the correction is severe enough – TLT could challenge last spring’s high of $124. Don’t bet on this. Take the trade in stages and make it prove itself along the way.

About NFLX – there is a strong possibility that NFLX will rally to its 8-period exponential moving average on the daily chart which sits at $141. NFLX is currently trading at $331 – then again this market doesn’t care what I think….

Best Regards,

Tim

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